Carton Conundrum

Cigarette carton sales a double-edged sword' for c-store retailers.

There are two ways to look at cigarette carton purchases at c-stores. One angl e i s t h a t consumers who are buying 50% of their cigarette packs from you could satisfy 100% of their weekly or biweekly fix by purchasing a single carton. That would be a nice ring.

The flip, of course, is that single large purchase would also mean many fewer trips and most likely a shrink in market basket.

This is the dilemma posed by Denise Indovina, vice president of ICOM (a division of Dallas-based Epsilon Targeting). The conundrum is reinforced by an ICOM study of 1,223 adult tobacco users. Pack purchasers—truly the dominant consumer of cigarettes—buy smokes 12 times a month on average vs. three purchases a month for those who buy cartons. And when asked how they purchased their cigarettes, 76% said they buy by the pack at c-stores with gas, and 73% at c-stores without gas. (More than one answer was accepted.)

“The most important thing is when a retailer is looking at their sales strategy,” Indovina says, “[is] they really need to understand a market-basket impact of moving or attempting to move consumers from pack sales to carton sales.”

Put another way, while that carton consumer may deliver you a nice onetime hit, you may not see that patron for another week or two, whereas that pack purchaser is at your store several times a week, typically augmenting the cig fix with other items.

Mike Zielinski, president and CEO of Royal Buying Group, Lisle, Ill., describes this situation as a “double-edged sword.” “Tobacco customers, if you keep them happy, can be your most loyal customers,” he says, and that it is “critical to the success of any c-store” to capture both pack and carton sales.

Merchants ideally should optimize both options, much like single-ticket and group sales for a museum or sports facility. And that is not happening.

Multipack/carton sales are down 13% in volume in c-stores vs. last year, and dollars are down 7.1% to $6.8 million, based on SymphonyIRI Group numbers in CSP’s NACS® State of the Industry Summit Special Issue 2011. That dollar decline is especially disconcerting when considering manufacturer increases and tax increases. In comparison, single-pack sales were flat in volume but up 7.3% in dollars at $46.7 million.

Perhaps the total decline in carton rings is not altogether surprising. Zielinski attributes the steep drop to price and the economy. While cartons might be more competitively priced than packs, fewer people have the money to spend on a carton these days—especially in states such as New York, where state excise taxes push that carton above $80.

Add to that a lack of promotion around carton sales: While most retailers sell cartons, most do not aggressively merchandise them, often leaving such sales to tobacco shops and online discounters.

Carton Malaise

Ken Lewis wants to sell more cartons.

Marketing director for the 26-unit Mr. Zip in Tennessee, Lewis prices his cartons at or near the state minimum. It’s a good strategy, but there’s one big hurdle: communication.

“The main problem in carton sales, or anything for that matter, is informing the consumer as to what the sale price is,” he laments. “There are so many styles and types of cigarettes, it is hard to merchandise carton sales.” Compounding marketing challenges, cartons are stowed behind the counter for government mandates, as well as to hinder theft. “The old saying ‘Out of sight, out of mind’ applies,” Lewis says.

Retailers can communicate to carton customers via cross-promotions to leverage larger rings. “So,” says Zielinski of Royal Buying Group, “whether it is with coffee in a coffee-club scenario, or whether it is discounts on a combination buy, there are a lot of different things they can do to promote.”

Economic Realities

Yes, discounts and promotions can boost sales. But there are new realities when it comes to consumer behavior and investment. Simply put, while communicating carton discounts and promotions might help enhance sales, customers who might once have turned to cartons to save on price per unit are shopping a different way, according to David Elkins, manager of retailer services for the c-store channel’s largest wholesaler, McLane Co.

“ ‘Value,’ these days, is reflected more in the form of multipack sales, including two-packs, three-packs and five-packs,” he says. Increased pricing from manufacturers and state taxes “have impacted many consumers to a point of looking for lower-cost alternatives to still save on and enjoy their favorite brand.”

Greg Mathe, spokesperson for Richmond, Va.-based Altria Group Inc., the parent company of Philip Morris USA, agrees about the value proposition and that cartons are not the prime focus for consumers or, for that matter, Altria.

“We are increasingly hearing from adult smokers that they are choosing stores based on the lowest cigarette prices and that they are looking for deals on their regular brand,” he says. “Therefore, we have a variety of resources for retailers to better connect with their adult consumers and meet their expectations, especially on their single-pack prices for Marlboro.”

Resources, he says, include product promotions, special price promotions and everyday value products, such as Marlboro 72s.

Focusing on single-pack sales and promotions also “has long been the case” for Reynolds American Inc., says company spokesman Richard Smith. But, he says, “Whether cartons or packs, we’d advise our retail partners to make sure they have the right products, promotions and pricing, and that they communicate this effectively to adult tobacco consumers who shop in their stores.”